Oil Market Spiral Threatens to Prick Global Debt Bubble, Warns BIS
The global oil industry is caught in a downward spiral as falling prices cause producers to boost output even more in a scramble to service $3 trillion in dollar debt. Energy companies are increasing production in defiance of normal market logic, leading to a bad feedback loop that is sucking the whole sector into a destructive vortex.
Saudi Arabia and the OPEC states are flooding the global market to knock out rivals in a battle for export share. The process may take longer and do more damage than originally supposed.
Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy. Leverage in the industry is amplifying the downturn as companies eke out extra production to stay afloat. Risk spreads on high-yield energy bonds have jumped, amplifying the effects of the oil price crash itself.
The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.
State-owned oil companies increased debt at annual rate of 13% in Russia, 25% in Brazil and 31% in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures, since they are cash cows for government budgets.
Oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a maturing financial cycle and to punishing moves in the global currency markets.
An illusion of sustainability has blinded borrowers and debtors, lulling them into a false of security when credit was easy and asset prices were rising. Dollar debt outside the US has surged to $9.8 trillion, a fivefold rise since 2000, and an unprecedented level for the global monetary system as a whole.
The average level of private credit in these countries has jumped from 75% to 125% of GDP since 2009. Corporate leverage is now more extreme than in the US and Europe. Profit ratios have dropped from 16% to 9% in four years.
The carry trade was profitable during ZIRP and QE, when credit was cheap and the falling dollar generated a currency windfall. Now that the Fed has raised interest rates, many countries have seen their currencies plummet. The broad dollar index has soared by 32% since July 2011, the steepest and most sustained rise since WWII.
Liquidity is drying up; dollar loans to emerging markets peaked at $3.3 trillion and began to fall in the third quarter of last year; and Chinese companies have slashed their dollar liabilities. We may be approaching the eye of the storm.